From: Wayne Jervis
Dear Sirs & Madames,
I am strongly in favor of penny increment options trading that (1) includes all listed options, (2) prohibits Internalization of order flow to the extent that it disadvantages the customer, (3) has pricing linked to all listed options exchanges, (4) does not exclude options above $3.00 in value, and (5) does not exclude illiquid/not-daily-traded options.
The reasons that I support the permanent implementation of this new pricing regimen are as follows:
1) In its current state, options trading severely disadvantages the buyer and seller to the advantage of the brokers and exchanges that stand to profit from excessively large spreads between bid and offer prices. It is routine to see spreads of $0.05 to $0.20 on options whose values range from $0.05 to $5.00. No other listed security class in the United States carried such a burden that bid-ask spreads consume up to 100% of the value of the option.
2) Options, unlike equities, have a time value which creates additional costs to buyers and seller who must enter the market up to a maximum of once a month to replace expired options. This costs options investors additional money, currently at least $0.05/ option based on the current minimum spreads (see #1 above, but repeat on a monthly basis vs. buy once for equities). Remember that equities have $0.01 increments, so the bias against options investors is repeated more frequently versus the more efficient equities market.
3) Options have settlement costs (upon exercise) which further undermine the economics to the buyers and sellers, to the advantage of brokerage firms and exchanges. These costs can routinely be an additional $0.01 to $0.05 per common share equivalent. This means that brokers and exchanges are complaining about costs on what is truly their most profitable product per transaction.
4) Computing costs are a Chimera: discount brokerage firms are already getting ahead of the SEC. Interactive Brokers is already listing quotes for options in penny increments. OptionsExpress is also permitting orders in penny increments for spread trades. If this business requires too much computing infrastructure, why are they taking this unmandated action? Clearly they are leaders and see the opportunity to make profits by serving their customers better and seek to take market share in the process. But remember that these two brokerage firms have the majority of their profits derived from the options markers, so they would hurt themselves if they tried to use penny-options as a loss leader. So they must forsee profits even in penny increment options.
5) I believe the number of transactions on equities in the US exceeds that of options. This would make feeble the argument that penny quotes would create huge transaction costs through a tidal wave of volume in quotes and trades. Please see #4, above.
6) Liquidity and market efficiency will be enhanced with tighter spreads. This means that investors will be better served by higher liquidity and better quotes.
7) Please do not exclude illiquid options because the additional liquidity of tighter spreads will create even greater benefits for currently illiquid options.
8) Please do not exclude >$3.00 options because these tend to be the more illiquid of the options. Trades tend to congregate in at the money options, which are mostly <$1.00. The more expensive options beg for more liquidity.
9) Please do not allow any internalization of order flow which would impair the investor. Make it a requirement for all quotes to be listed on all exchanges for maximum pricing advantage to accrue to the buyer and sellers, not the brokers and preferred exchanges (which provide kick backs to the brokers to get trading volume from brokers).
Thank you for reading my request.